Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of Unbalanced: The Codependency of America and China.

Fine Stephen. We are at economic peacetime now. But the turkeys are coming home to roost, sooner than anticipated.

We are getting closer and closer to the point where technology will expel human labor from the production line.

Zillions of people will become NINJAs. And if anyone dares to believe that Central Banks will helicopter money in a useful way to withstand the shocks of the masses, I can recommend good vintage wines for the journey.

Zillions of people will become useless, hopeless etc. Good luck sending them a monthly check forever.

That moment, the world will witness economic warfare with a ruthless hardness never experienced before. But it will not stop there. Those who believe the West will no longer experience shooting wars, better start ordering more wine asap.

"Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia, who is today viewed in Beijing as a strong supporter of China, "China fires back over ‘flawed’ S&P credit rating downgrade - The Australian, September 24, 2017

Stephen S. Roach warns the US against any trade war with China, as both countries find themselves in a "codependence trap." There are immense economic exchanges and co-operation between the two countries, since the US and China are the world's largest and second largest economies respectively. However Trump and his like-minded don't see that these exchanges and co-operation have yielded tangible benefits to the US and its people.During his campaign Trump had accused China of "raping" America with its cheap exports, and of deliberately devaluing the renminbi to undercut global export prices - currency manipulation. However China hoped that Trump would change his tune once he took office. He hosted Xi Jinping at his Mar-a-Lago retreat in April, and bragged about the "tremendous progress" he made with his Chinese counterpart. It was all smiles and good spirits. Forgotten was his China-bashing during the campaign.Somehow, Trump wants to keep his campaign pledges, which promised a new era of economic nationalism - "America First." He is itching for a fight with China in recent weeks, criticising Beijing for continuing to trade with Pyongyang, and saying he was "very disappointed" with China for not doing enough to stop North Korea's weapons programme. "They do NOTHING for us with North Korea, just talk," he wrote on Twitter in July, after North Korea claimed to have tested its long-range missile.Last month the Trump adminstration announced it was planning to launch an investigation into Chinese intellectual property violations that could result in severe trade penalties - "high and widespread tariffs on Chinese imports." This action revives the allegation of China's "theft" of intellectual property - an escalation of a crisis that could present both opportunities and risks at a time when the US needs China’s help to contain the North Korean nuclear threat.Xi Jinping spoke at Davos earlier this year as a defender of an open, globalised international economy. He knows that his own country’s economic performance, and therefore the stability of the Communist Party, depends on it. The author highlights the downsides of imposing tariffs on Chinese imports, which would hurt American consumers. Higher prices would trigger an inflation, taking a toll on ordinary Americans, who are struggling with "real wage stagnation." This would lead to higher interest rates.The author says China has several tools to retaliate by reducing its holdings of US Treasury securities - $1.15 trillion in June 2017. Beijing could stop buying Treasuries and turn its back on US dollar-based assets. This would help create even larger US-deficits, especially when Trump wants to cut taxes and increase spending on some projects. Most of all "the lack of demand for Treasuries by the largest foreign owner could well put upward pressure on borrowing costs," at a time when "growth in US domestic demand still depressed." American companies need to rely more on exports, which fear losing access to a major export market.Little is known that "China’s economic leverage over America is largely the result of low US domestic saving." Many Americans follow the "buy now, pay later" instinct, creating huge household debt. Saving is important. But not many put aside part of their disposable income for rainy days, or generate more wealth by investing. With personal saving rate in America about 1 percent, many economists and policy-makers are becoming increasingly concerned. They say, if this low rate persists, it could lead to much lower investment rates, and hence, lower growth rates of labour productivity and real income.The author says: "Fostering policies that encourage an economy to squander its saving and live beyond its means makes trade deficits a given." For decades, due to "lacking in saving and wanting to consume and grow, the US must import surplus saving from abroad to close the gap, forcing it to run massive current-account and trade deficits with countries like China to attract the foreign capital." He thinks it's a "chicanery" that the Trump administration names "China, America’s NAFTA partners, or even Germany as the culprit in a saving-short US economy," because the US "ran trade deficits with 101 countries in 2016 – a multilateral external imbalance rooted in America’s chronic domestic saving problem."The author fears the current administration’s policies will likely create "larger budget deficits that put national saving under additional downward pressure." And it doesn't "hold the trump card in its economic relationship with China." He advises Trump not to ignore the consequences of "getting tough on China." Surely China needs the US for its exports. An economically weakened America will take a toll on China's growth. Despite its economic might, it is not in the position to replace the US. So the two countries are perpetually trapped in this web of interdependence, and will have to sort out their political differences in order to forge an amicable working relationship.

Roach seems to be saying that the US should grin and bear it, that China has done bad things, but if the US tries to retaliate China also will, etc., etc. Nowhere in his article is there any realization of what US retaliation would do to the Chinese economy and to the legitimacy of the Politburo. His only "concern" is for the American worker/consumer, who he sees as being harmed by any action taken by either the US or China - although they have been grievously harmed already.

I guess Roach, and the plutocrats he represents, will be happy only when the real wage in China equals that in the US and the labour incentive no longer compels outsourcing. The epic blunder of the US is , first allowing Japan to harm America and excusing it as necessitated by the Cold War, then letting China copy the Japanese playbook.

After Clinton, Bush and Obama all showed themselves to be lackies of Wall Street and multinational corporations, is there any wonder that American workers turned to trump? At least he acted as though they existed. Corporate America doesn't care from where their profits originate or how they originate. A Chinese worker/consumer will do just fine. There is no co-dependency; the US can shut down the Chinese economy, and endure some short-run pain, but it already has endured great longer-term pain. All remedies have side effects.

Actually Mr.Friesen speaking if only for myself, I have no objection to people in China becoming as rich as people in the US. What I object to is MY government sacrificing MY families interests to make people richer in China. Call me old fashion but I thought my governments job was to represent my interests NOT ship my job to China. But what do I know i am only a deplorable according to our political establishment.

Why do you have a problem with people in China becoming as rich as people in the U.S.? That would just seem fair to me. In fact, the world economy will only be fair when people everywhere have comparable opportunities.

You have identified the risks but not the consequences. there will be counteractions and mitigating effects, as with everything in life. Less Chinese imports will partially mean higher prices, import diversification, more US manufacturing and less consumption, And all of this is good, no one has so much shit as the average American family. Your second point, yes, the Chinese will have kless USD and will invest less in US treasuries. But with less overall imports and more US manufacturing, the US will need less Treasuries to keep stable.
Third, selling into China - this has been a pipe dream. Name me a single US company that has profited from the Chinese market, not Chinese based manufacturing. . . They do not exist in real life, alas.

Fundamentally, the US market is the most valuable market in the world, there will always be suppliers, the loss on China will be immeasurably higher. You do not think they will be able to sell all that shit to Russia and N Korea, do you?

Stephen, you are living in yesterday’s global macroeconomic world. The macro game has changed.

“Trade war/tax hike on American consumers?” We have an unreal overcapacity here in the US. Wage push is nonexistent.

“Higher Interest rates?” The dollar is the world’s reserve currency. Full Stop! As irresponsible and profligate as our central planners have been and ZIRP has ripped apart our savings and forced risk out the curve in search of yield, we (the $ dollar and US market) is still the cleanest dirtiest shirt in the laundry/world. By a long shot. There is no formidable alternative. The yield search will continue until it all goes away. But that is a long time away based on the global competitive landscape, our laws, and the fact that there is absolutely no alternative. I can go on about demographics, etc. Not worth it.

“reinforcing a strategy of asset diversification away from US dollar-based assets that has been under way for the past three years”
Ask an asset manager...seriously. Sell US and buy what? Roll $1bil of your dollars into what currency? $1bilis an odd lot. Try rolling $1trillion. Roll to Germany? EC? Swiss? Aus? Japan? Russia? China? Stephen, the central bankers blew up your macro-models 10 years ago with the helicopter money and ZIRP.

Hate him or love him here is the skinny: Trump is for America First, He also is for reducing the trade deficit. $1bil more in every state pockets each month would do wonders. Let’s start to figure out how to do it instead of just letting the status quo (-$50bil/month trade deficit) continue. He can achieve this and it is disruptive.

I have long felt this but it was succinctly summed up by Sundance at The Last Refuge last week:
"Trumps strategic objectives for national security are being delivered through a Trump Doctrine via economic leverage. The results are stunningly effective.

From OPEC (Saudi Summit) to the EU and Baltic States (Poland Pre-G20); to North African energy development via President Macron (Libya and Mali); to walking away from the Paris Climate agreement; to discussions with Theresa May on a bilateral trade deal; to massive shipments of coal to U.K. and France; to closing a deal to deliver Ireland massive amounts of Texas LNG; to our own internal U.S. energy production policy with pipelines, Oil, Coal and Liquified Natural Gas (LNG) etc.

President Trump has used all of those “allied” relationships to lower global energy prices. President Trump, by lowering global energy prices, has fractured the foundation of energy producing nations to influence geopolitical strategy; Trump has diminished their most powerful tool. As a consequence, economic adversaries like China are put into a position of having to spend more money, directly, to aid their allies and to maintain their influence.

The Trump Doctrine of using economic strategy for the trade policies you revere as sacrosanct is forcing China to spend more and yet simultaneously they are facing less income. And remember, as a combined result of their dependency on international trade and a trade surplus with the U.S., China’s central bank vault holds “dollars”. China’s primary defense threat, if you want to call it that, would be to dump dollars to retaliate against what President Trump is doing. However, if the value of the dollar drops, China has less value in their vault, and a lower dollar actually helps our exports.

Now when you step back, and look at the bigger BIG PICTURE, and think about North Korea, Pakistan-Afghanistan, and the other geopolitical hot-button issues where China is involved…. And then overlay Russia’s lack of energy revenue and simultaneous drain on resources via Syria,… well, you begin to see how effective the Trump Doctrine is.

Stephen, like many traditional economists, your tools are dull, and no longer work in todays centrally planned world awash with dollars and no place to put them but keep them in dollars.

There is no sign of inflation, higher interest rates in a global dollar oversupply of biblical proportions? There is NO ALTERNATIVE or relief valve for the dollar to devalue against. They are all in significantly worse shape than the USA.

You may not like Trump and your models are likely broken from the central planners. But DJT, (and yes you can all hate him) is using the economic leverage of the United States in ways that no other sitting President has used.

Headlines and articles like this one were plausible in the 90’s and 00’s when rationality and Austrian economic theory ruled, but since then, they have lost their credibility.

The macro economic forecasting game is over.

Let me ask anyone. Do you believe ANYTHING you hear economically out of China?

America is more advanced commercially, and takes with contracts. At the end of the day it is unclear who is taking more IP from the other without paying for it.

Just look at the typical T&C (Terms and Conditions) that the major American importers demanded of their vendors, and you will find similar provisions everywhere:

"CONFIDENTIAL INFORMATION; NONDISCLOSURE
Supplier shall not at any time, during or after the Term of this Agreement, disclose to others, take or use for its own purposes or the purpose of others, any of Company’s confidential information, knowledge, designs, data, know-how, trade secrets, or any other information considered “confidential” or “proprietary” by Company. Supplier understands, agrees and recognizes that this obligation applies, but is not limited to, technical information, designs, marketing and financial information, and any business information that Company treats as confidential. Any confidential information, knowledge, designs, data, know-how, trade secrets, or any other information considered “confidential” or “proprietary” by Supplier which the Supplier shall have disclosed or may hereafter disclose to the Company and which in any way relates to the goods or services covered by this order, agreement or contract, shall, unless otherwise specifically agreed to in writing by the Company be deemed to be confidential or proprietary information and further shall be acquired by the Company free from any restrictions (other than a claim for patent infringement) as part of the consideration for this order, agreement or contract. No cause of action will arise on Supplier’s behalf for Company’s use of any confidential information disclosed to Company, and no damages whatsoever shall accrue to Supplier for Company’s use thereof. Supplier shall keep confidential any and all technical processes and information, economic and financial information, designs, data, marketing information, and any other business information that Company treats as confidential furnished to Supplier in connection with this order, agreement or contract and Supplier shall not divulge, export or use directly or indirectly, such information for the benefit of any other party without obtaining Company’s written permission. Supplier shall return all items belonging to Company and all copies of documents containing such confidential information in Supplier’s possession or under Supplier’s control upon request by the Company or termination of this Agreement."

[Note how that "what's yours ends up mine" language is craftily hidden in the middle of the passage, buried deep inside the fine print on page 10 of the T&C. Typical American style drafting.]

You think that is bad? Try this next clause found in most of the contracts from big American buyers:

"INTELLECTUAL PROPERTY
Absent a separate express agreement between Supplier and Company and after one year from date of importation of Merchandise into the United States which in any way relates to the goods or services covered by an Order, Supplier will irrevocably grant to Company a full paid up, royalty free license to make, use, sell and offer for sale any such Merchandise free of any claim of infringement or misappropriation of any intellectual property of Supplier. The aforementioned paid up license will remain in effect until the expiration of any intellectual property relating in any way to the Merchandise."
__________________

Can you imagine clauses like that imposed on Microsoft, or Intel, etc., by any Chinese entity without causing a fire and brimstone response?? Yet this sort of chicanery (getting valuable IP without paying fair value) is imposed by major American companies in contracts of adhesion on hundreds of thousands of Chinese exporters year in and year out. I believe that China had been ROBBED of hundreds of billions of dollars of valuable IP over the decades.

What is good must be universal. If IP is to be protected, everyone’s IP should be protected.

Wow, you got a hold of an actual contract, great job, my friend! Can you also be so kind as to share how seriously the Chinese partners are taking these provisions? or any contractual provisions as they relate to IP?

Aside from the fact that each company has its own contract language and thus the language you quote cannot be called "typical," any such language relating to US intellectual property is worthless in China because it would not be enforced against a Chinese company by a Chinese court.

Bilateral economic relations are much more than just exports. American companies make about 5 times the profits in and from China than the other way around, and most of those profits are P/Eed on the stock market to represent trillions of dollars in stock value. China exports to America typically have low margins (5-10%). American products and services have much higher margin (think Microsoft 98% gross margin). There is also no inherent reason that American entities like Starbucks, GM, YUM Brands, etc., would or should be allowed to make their tens of billions of profits selling in the China market.

In terms of balance of profits, the relationship had always been very lopsided in favor of America. Should a trade war break out, America is the one getting hurt. China just would have to up the game and sell more to the rest of the world.

Roach’s objection to punishment is that America and Communist China are economically interdependent, thus the latter’s retaliation would harm America’s consumers and businesses.

So, if one side cheats, the other should let it cheat, no problem. And America is at fault by its forever low savings rate. Would Communist China and other countries continue to cheat if America had a high savings rate? Yes.

Roach is silent on cheating. Ought America cheat as does Communist China? If everyone cheats, why have agreements? If agreements are to be had, even “deeply entrenched” agreements, why shouldn’t America stand up to their violation, determine how to punish the violator, and ask why America got into such a fix.

Roach has elsewhere written that "nothing is more important to the Chinese than stability - whether economic, social or political.” Perhaps tariff action would cause a whiff of instability in Communist China, and make them think twice about the degree of its cheating. And who knows? American consumers may be supportive of tariffs, notwithstanding the higher prices they might pay.

I agree with much of this, but I don't see how such trade actions would necessarily lead to higher interest rates. The thinking in the article is too simplistic.
Interest rates are set by the central bank, in the case of the USA, that is the Federal reserve. And the FED can create money, so if China cuts back on the money it lends, the FED can just step in and replace that money, keeping interest rates wherever it sees fit. It is, however rational to ask the question: would trade actions lead to the FED wanting to raise rates? I doubt it, but it is possible. If trade barriers lead to higher prices, as is quite likely, the FED might react to that inflation by raising interest rates. It would, though, be unwise to do so because that inflation would not represent an over-heated economy, but would be a one-time increase.

It is China, not the US, that is reliant on foreign demand. The greater the exports from China, the less need for China to support domestic employment by ever-mounting, unproductive debt.

Further, the US administration has clearly shed its illusions that China is going to be transformed any time soon into a liberal democracy like Japan, South Korea, or Taiwan.

It therefore makes perfect sense for the US to make trade policy based on its own interests, and doing something about Chinese theft of Intellectual Property (IP) is high on the list.

Finally, the myth that the US deficit is due to Americans' failure to save was exploded long ago. The US has ample supplies of domestic capital; it has no need to import foreign capital to fund investment, as is proved by its low current interest rates.

I wiil point out that has your own statement " Chinese producers’ unit labor costs are less than one fifth those of America’s other major foreign suppliers." Might explain a whole lot about the issue. Such has why working class voters who used to earn a living in production and now stock shelves at Walmart hate China with such a passion.
Bluntly Trump is the result of a trade war NOT the creator of it. I'll say that even though I despise Trump and didn't vote war.
China has been waging a trade war on the US for quite some time. Forced intellectual property sharing ring any bells. Followed by has soon has the property and skills are transferred to Chinese interests Lo and Behold the Chinese government finds a reason to lock the US company out. Or perhaps the Chinese government's complete and utter contempt for intellectual property agreements they signed. Or perhaps dumping and currency manipulation?? The Chinese government is hardly innocent aggrieved party in this mess. The Trade War has been going on a long time and has i said "Trump is the result and NOT the Creator of this so called trade war."

People who say the US trade deficit is the US's fault do not understand economics. It is like analyzing a car backwards and saying the exhaust pipe is where it all starts. They steal our profits to enhance their political control. The US compensates with housing bubbles, govt deficits. Global corporations win with extra profits and the middle class suffers. Why can't the elite see the evidence? Is it because they are making money so they don't want to?

The fact is that China shipped containers of goods to the US by the million year after year. And in return takes home promise note which the US can print with almost nothing. Yet a lot of Americans complained against China.
Nah, Americans should all pray that the Chinese people would allow this to continue.

If the US trade deficit is not the fault of the US but instead is the result of actions taken by unspecified others, then it would appear that the Chinese trade surplus must be not to the actions of the Chinese and their government but also to the actions of the same "others."

It's unclear to me if Trump wants to make "America great again" in percentage of world gdp, e.g. at the end of WW2 the US gdp was, proportionally to the rest of the world, very great, or if he wants to MAGA in terms of social and economic structure, with a large manufacturing base. If he is aiming at the latter MAGA he might want to launch various types of protectionist measures, make the US internally "great" in reforming whatever socio-economic balance he and his electoral base deems as great, while sacrificing any future economic, cultural or political relevance of the US on the world stage.

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